January 18, 2024
Fact Sheets

Carbon credits and compensation claims: the state of the VCM

The latest available data on global carbon credits exchanges (2023).

Key Takeaways

  1. Currently, the vast majority of carbon credits exchanged in the voluntary carbon markets are based on emissions reductions or avoidance projects, which are not a scientifically-sound way of balancing CO2 emissions to claim reaching net zero.
  2. However, thanks to growing greenwashing awareness, recent legislation, and national case law, the demand for this type of carbon credit is expected to decline, with an opportunity for investments to be funnelled towards more robust and sustainable credits based on permanent carbon removals.
  3. In this context, there is a need for a regulatory framework that incentivises the safe scale-up of carbon removal technologies and clearly defines their use as the only legitimate tools for organisations to balance their residual emissions.

The voluntary carbon market (VCM) involves the trading of carbon credits, where individuals or companies can purchase credits to compensate for their carbon emissions. These credits can represent investments in different types of projects that reduce or capture greenhouse gas emissions, such as renewable energy initiatives, afforestation or carbon removal projects. 

The latest available data shows that the total value of carbon credits trading in 2022 was around $1.5 billion, corresponding to approximately 200 Mt of CO2. Carbon dioxide removal (CDR) represents 3% of all VCM transactions in terms of volume that year, but 10% of the VCM’s monetary value, which demonstrates its high value both from a financial and environmental point of view. 

While it is difficult to anticipate the future of the VCM, there are signs that investments in faulty compensatory measures, such as carbon credits based on emissions avoidance and REDD+ projects, are reducing thanks to consumer consciousness and businesses’ efforts to become more responsible. As these credits comprise the majority of the VCM, the market size is shrinking. Accelerating CDR would help recapture those lost investments and carbon credit purchases, steering the market in a more sustainable direction.  

Today, the EU only represents about 1% of the global market share. There is therefore an opportunity to make great leaps for Europe as it reaps the benefits of a greater market share of the VCM. At the same time, we see an urgent need for the EU and its member states to set up clear rules for organisations, especially private companies, buying credits and making specific claims around their climate benefits. 

A legitimate compensation is done when an organisation has fully committed to reducing its GHG emissions along its value chain and aims to compensate its residual emissions through carbon removals based on the “like-for-like principle” (fossil fuel emissions are balanced with geological removals and biogenic emissions with biological removals). 

Through the proposed Carbon Removal Certification Framework (CRCF) and the Green Claims Directive, the EU has the opportunity to provide clarity on the use of carbon removal credits, avoiding greenwashing and achieving higher transparency, while supporting the scale-up of CDR as a key family of net-zero technologies and methods. 

The UN Intergovernmental Panel on Climate Change (IPCC) states in its April 2022 report on mitigating climate change that “the deployment of carbon dioxide removals to counterbalance hard-to-abate residual emissions is unavoidable if net zero […] emissions are to be achieved.” 

 

Read more about Carbon Gap’s position on the Green Claims Directive